Historically there has been relatively little enforcement focus on the typical physician-ownership model used by many ambulatory surgery centers (ASCs). A qui tam lawsuit filed recently against an ambulatory surgery center company based in Nashville, however, indicates that qui tam relators are leaving no stone unturned as they look for cases. Although the federal government has declined to intervene in U.S. ex. rel Thomas Reed Simmons v. Meridian Surgical Partners, et.al (Civ. Act. 3:11-CV 00439), and the case appears to have little merit, owners and operators of ambulatory surgery centers should expect further challenges in the coming years as the government and qui tam relators look for new targets. As a result, it is time for ASCs to begin taking the same compliance training and qui tam prevention steps as those taken by hospitals.

The relator is the former business manager of Treasure Coast Center for Surgery, a surgery center affiliated with Meridian Surgical Partners. In his complaint, the former manager alleged that several aspects of Meridian Surgical Partners’ ownership and operations of its ASCs constituted federal anti-kickback violations and, as a result, the Meridian ASCs’ Medicare reimbursement claims were false claims. The lawsuit focuses on:

The manner in which the ASCs purchase price was determined. The relator noted that Meridian Surgical Partners acquired its controlling interest in Treasure Coast Center for a purchase price that was based on a multiple of the center’s EBITDA (eight times the center’s 2006 earnings), and alleged that a purchase price based on a multiple of earnings, rather than on asset value, was in effect a payment for “goodwill,” or the surgeons’ referrals to the center.

The manner in which the ASC paid profit distributions. The relator alleged that because the purchase price was excessive, the distributions paid to physician partners in the center were “above-market distributions to referring shareholders,” constituting illegal kickbacks. (p. 10 of the Amended Complaint.)

The manner in which the ASC operating agreement defined buy-out “triggering events.” The relator argued that the terms of the ASC’s operating agreement evidenced that the center was illegally requiring physician investors to refer Medicare patients as a condition of their investment. In particular, he pointed to the fact that “triggering events” allowed the ASC to buy back physician investors’ interests upon the physician’s retirement, relocation, or exclusion from Medicare.

The manner in which minority interests were priced. The relator also argued that the price differential for minority and controlling interests evidenced a violation of the anti-kickback statute.

The factors cited by the relator as evidence of kickback violations are fairly standard in the ASC industry, and it would be troubling if the relator prevails. Pricing a center on the multiple of earnings is a commonly accepted methodology for determining fair market value. Likewise, buying back interests held by physician investors upon certain “triggering events” is the only way to maintain compliance with the ASC Safe Harbors to the federal anti-kickback statute and preserve the viability of the ASC. Federal enforcement authorities have a long-standing position that investment by active physicians in the community is appropriate for those physicians who use the centers as extensions of their practices. Moreover, practicing physicians in good standing are in the best position to help ensure quality clinical operations that are up to date with the latest medical advances. However, at least one OIG Advisory Opinion (AO 09-09) noted that valuing an ASC on a multiple of earnings could potentially be viewed as taking into account the volume or value of the physicians’ referrals in violation of the anti-kickback statute.

As the government and potential qui tam relators look for targets, ASCs should be prepared. ASCs may wish to look to hospitals, which have been significantly targeted by whistleblowers, for guidance in how to minimize the potential of such lawsuits. Strategies that ASCs may wish to consider include:

Establishing and maintaining a vibrant compliance program with periodic, robust training of staff and owners.

Compliance officer conduct exit interviews with all departing employees to determine if the employee knows of any compliance issues and asking the employee to sign a statement regarding known and unknown compliance issues.

Adopting a formalized valuation methodology for pricing surgery center acquisitions and physician interests. A formal valuation by a third party valuation firm is of course the best defense. For ASC companies that own and operate many centers, however, obtaining formal valuations can become cost prohibitive. If a surgery center company uses a multiple of EBITDA for its pricing, the company would be better positioned to deflect challenges to its pricing if it has a consistently applied policy or methodology.

Clearly articulating to physicians and company employees the legitimate, clinical and quality-of-care rationales for the buy-back and other provisions of the ASC’s partnership or operating agreement.

Applying buy-back provisions in a consistent manner.

Avoiding punitive buy-back or repurchase prices.

In the past, the government has generally not focused on the ASC industry with respect to fraud and abuse enforcement. With hungry qui tam relators looking for potential targets, however, ASCs may soon find themselves facing new risks. Adopting a rigorous compliance program, and providing clear guidance and information about valuations and operating agreement requirements will go a long way toward forestalling legal attacks.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.